What to Expect from the Market After Lula's Reelection
The Ibovespa plunged, the dollar hit R$ 5.60, and yield curves surged after Sunday's runoff upset market expectations.
13 min readOct 26, 2026
What to Expect from the Market After Lula's Reelection?
The data points to months of high volatility rather than an immediate, guaranteed rebound. Asset prices had priced in a win for Flávio Bolsonaro, the yield curve began pricing in a Selic rate hike in November, and banks are projecting the dollar between R$ 5.20 and R$ 5.65. The government's fiscal response will ultimately decide the market's trajectory.
Commercial DollarR$ 5.45+9% in early afternoon; peak of R$ 5.60. Friday: R$ 4.99
Tesouro IPCA+ 2040IPCA + 7.71%was 6.58% on Friday; bond price down 14%
Fixed-Rate 203215.78%was 12.90%; above the March 2020 peak
Selic Rate Today13.75%curve began pricing a ~75% chance of a HIKE on Nov 4
Midday trading figures. The values above are intraday figures from 10/26/2026 (InfoMoney, CNN Brasil, Seu Dinheiro, and Reuters, between 12:00 PM and 2:40 PM). A circuit breaker was triggered at 9:57 AM, the first since March 2020. If losses hold through the close, it will mark the largest single-day drop since September 10, 1998 (−15.8%).
Why Was the Sell-Off This Severe?
Because the market had bet on the alternative outcome. The final polls from Datafolha and Quaest on 10/24 showed Flávio leading with 51% of valid votes to Lula's 49%. Between the two rounds of voting, the Ibovespa rose 6.9% and the dollar fell 4.4%. On October 9, the index hit a record 209,066 points, with the dollar trading at R$ 4.98.
Lula won with 51.79% to 48.21%, according to the Superior Electoral Court (TSE). Asset prices built for one scenario had to be unwound in a single session. BTG Pactual had already run the numbers prior to the outcome: a Lula victory would shave roughly 17% off the Ibovespa (toward 170,000 points), drive the dollar up 10% to 15%, and push long-term interest rates above 8%. The session low of 169,500 points landed almost exactly on that estimate.
This explains the contrast with 2002 and 2022, when Lula also won. In those elections, market anxiety was already priced in before the vote. This time, relief was what had been priced in.
A study by Elos Ayta, published by InfoMoney on 10/23, tracked the Ibovespa and the dollar from the runoff election through the end of the year in every presidential race since 2002:
Election
Winner
Ibovespa Through Year-End
Dollar Through Year-End
2002
Lula
+12.52%
−7.06%
2006
Lula (reelection)
+13.08%
N/A
2010
Dilma Rousseff
−1.94%
N/A
2014
Dilma Rousseff (reelection)
−3.72%
N/A
2018
Jair Bolsonaro
+4.88%
+6.54%
2022
Lula
−4.19%
−2.39%
Research from FGV/DataBay points to another pattern: the Ibovespa dropped in the trading session immediately following the election in four of the six races, but five sessions later it traded above pre-election levels in all of them, posting an average gain of 3.22%.
The limitation of this comparison. None of those prior elections began with a sell-off of this magnitude. The worst initial trading session in the historical series was −4.4%, in 2002. The 2026 slump is on an entirely different scale, making historical comparisons more useful when paired with other sessions where the stock market fell over 10%.
V-Shaped Recovery or Slow Bleed? Three Precedents
The overriding question today is whether investors can buy the dip in anticipation of a rebound. Brazilian financial history offers both outcomes, and what separated them was not the size of the initial decline.
Episode
The Shock
What Followed
September 1998
Russian debt default; Ibovespa down 15.8% on 09/10, five circuit breakers in under a month
The real was devalued in January 1999. In the first quarter of 1999, the Ibovespa surged 57.67%, the best first quarter in the historical series
March 2020
Pandemic; single-day drops exceeding 12% and six circuit breakers during the month
V-shaped recovery: the Ibovespa finished 2020 above its 2019 closing level
October 2014
Dilma Rousseff's reelection; −2.77% the following day
Years of stagnation: 2014 closed down 2.91%, 2015 dropped 13.1% (the third consecutive annual decline), the dollar rose 48.5% in 2015, and Brazil lost its investment-grade credit rating in September 2015
In 1999 and 2020, clear turning points materialized: a floating exchange rate paired with a new economic policy framework in the former, and global stimulus fueled by zero interest rates in the latter. In 2014–2015, no such pivot occurred: deficits widened, inflation exceeded 10%, and equities only recovered following a change in government in 2016.
Consequently, market analysts are focusing on similar fundamentals. Sidney Lima of Ouro Preto Investimentos highlights fiscal management of public accounts as the core concern, warning that the risk of a deeper correction remains elevated. Thomas Haugaard of Janus Henderson notes that attention has shifted directly to the economic team and the fiscal roadmap. Fábio Murad of Wiser points out that while circuit breakers capture selling intensity, they provide no indication of how long the sell-off will last.
Equities: What Major Banks Are Saying
JPMorgan: Downgraded the Brazilian real and local government bonds from overweight to marketweight, warning that further losses of up to 20% on the Ibovespa cannot be ruled out amid monetary tightening.
Goldman Sachs: Sees heightened fiscal risk, making the 2027 federal budget and legislative relations with Congress critical focal points.
Citi: Expects selling pressure to persist.
Capital Economics: Noted that "Lula's surprise victory will dash hopes for reforms" and diminishes the likelihood of interest rate cuts.
Gavekal Research: Adopts an opposing view, treating the correction as a buying opportunity given that Brazil's fundamental economic drivers remain intact.
XP: Advises against making decisions driven by panic.
Equities did not fall uniformly. Banco Brasil shares tumbled roughly 28%, while Petrobras dropped nearly 9%, reflecting state-owned enterprises carrying higher government interference risk. Conversely, exporters gained ground due to dollar-denominated revenues: Suzano rose 8.2%, Embraer 7.4%, Vale 5.6%, and WEG 4.6% in late morning trading.
The Dollar: How High Can It Go by Year-End?
The commercial dollar moved from R$ 4.99 on Friday to a trading range between R$ 5.45 and R$ 5.60. Projections published on the day include:
Institution
Projection
BTG Pactual (pre-election, Lula scenario)
+10% to +15% (R$ 5.49 to R$ 5.74, based on Friday's close)
JPMorgan
R$ 5.50
Armor
R$ 5.60 to R$ 5.65
Suno
~R$ 5.40 in 2027
MA7
R$ 5.20 to R$ 5.30
Focus Bulletin (surveyed THROUGH 10/23, pre-election)
R$ 5.05 in 2026 and R$ 5.15 in 2027
Next Monday's Focus survey will reflect how much economists have revised their forecasts. Currently, most forecasting institutions publishing figures place the exchange rate between R$ 5.40 and R$ 5.65.
And December? The Impact of Year-End Profit Remittances
December brings a well-documented seasonal pressure point: multinational corporations remit profits and dividends abroad, generating strong corporate demand for U.S. dollars. This dynamic played out in each of the past two years. In December 2024, the dollar climbed approximately 3% to reach R$ 6.27, prompting the Central Bank to sell US$ 12.7 billion across four days—its largest intervention since the pandemic. In December 2025, the currency advanced 2.89%.
However, long-term historical trends do not support a strict rule. Data compiled by Clube dos Poupadores from 2000 to 2024 shows that December actually recorded the lowest probability of a dollar increase among all months, at 46%. While corporate remittances exist, in many years they are offset by export inflows and Central Bank interventions. Remittances exert greater pressure primarily when markets are already experiencing stress, as seen in 2024.
Yields and Tesouro Direto: Have Rates Returned to Record Highs?
Almost. Tesouro IPCA+ inflation-linked bonds recorded the second-largest daily rate increase since the series began in 2005, according to InfoMoney, trailing only the 1.62 percentage point jump on March 12, 2020. The Tesouro Direto platform opened nearly three hours late, and the National Treasury canceled its scheduled weekly auctions while repurchasing roughly R$ 7.1 billion in fixed-rate debt.
Bond
Friday (10/23)
Monday (10/26)
Session Bond Price Change
Tesouro IPCA+ 2032
IPCA + 6.72%
IPCA + 8.10%
−7.1%
Tesouro IPCA+ 2040
IPCA + 6.58%
IPCA + 7.71%
−14.0%
Tesouro IPCA+ 2050
IPCA + 6.42%
IPCA + 7.64%
−23.6%
Tesouro Prefixado 2029
12.76%
15.40%
N/A
Tesouro Prefixado 2032
12.89%
15.78%
−12.2%
For recent context: on June 18, 2026, the IPCA+ 2032 opened at a record 8.51%, and the IPCA+ 2045 reached 7.67%. In 2024, holders of the IPCA+ 2045 experienced a mark-to-market loss of 21.9% over the course of the year. According to XP, yields exceeding IPCA + 6.5% have only been available on NTN-B bonds 30.7% of the time since 2009.
Two investors, the same bond, opposing outcomes. Investors holding long-term IPCA+ bonds saw prices drop up to 23.6% in a single session—representing paper mark-to-market losses that only crystallize if sold prior to maturity. Conversely, buyers today lock in higher yields through maturity. Yields can also climb further before reversing: investors who purchased the IPCA+ 2045 at 6.53% in July 2024 watched rates surpass 7.2% six months later.
The Selic benchmark rate stands at 13.75% following five consecutive cuts. Prior to the runoff, the yield curve was pricing in a near 100% probability of another rate cut at the upcoming Copom meeting on November 3 and 4. On Monday, according to Reuters, markets shifted to price in roughly a 75% chance of a 0.25 percentage point hike, with additional rate increases anticipated in December and January. For investors in floating-rate instruments, this points to an elevated CDI rate for a longer duration. For those weighing options against Tesouro IPCA+ bonds, the math shifted overnight.
Real Estate Funds (FIIs): Do REIT Equivalents Fall Less Than Equities?
During two of the three most recent market stress episodes, they held up significantly better:
Year
Context
IFIX Index
Ibovespa
2015
Recession, credit downgrades, rising Selic rate
+5.41%
−13.31%
2022
Selic at 13.75%, elections
+2.22%
+4.69%
2024
Fiscal stress, rising long-term interest rates
−5.89%
−10.36%
However, two headwinds apply. First, Brazilian real estate fund unit prices move inversely to long-term interest rates, as investors compare fund yields directly with inflation-linked Treasury bonds, which just climbed nearly two percentage points. Second, rental income for brick-and-mortar property funds depends on macroeconomic health (vacancy rates, lease adjustments, and default rates), meaning a weaker economy weighs on distributions with a time lag. Paper-based FIIs, which hold debt instruments yielding CDI or inflation plus a spread, find their revenue protected by high interest rates, provided borrowers continue servicing debt. Individual fund metrics are available on the FIIs page.
Dividend Taxation: What Is Real Versus Speculation
It is already in effect. Law No. 15,270/2025, enacted on November 26, 2025, and effective since January 1, 2026, levies a 10% withholding tax on corporate dividends exceeding R$ 50,000 per month paid by the same company to an individual shareholder. It also established a minimum tax framework for individuals with annual incomes above R$ 600,000, assessed on 2027 tax returns. Profits generated through 2025 with distributions approved by December 31, 2025, remain exempt.
As of this writing, no formal proposals to raise this taxation further have been introduced. The primary questions center around the 2027 federal budget and how the government plans to close its fiscal gap. This is where the newly elected Congress comes into play: projections from the first round indicate the Liberal Party (PL) will hold the largest bloc in the Chamber of Deputies (roughly 121 seats compared to 88 for the PT federation) and the largest Senate representation since 1988 (28 senators). No single party commands an outright majority, meaning any new tax legislation must navigate this legislative landscape.
Three Scenarios and Their Driving Factors
Scenario
Prerequisites
Historical Parallel
Relief
Credible economic team appointments, 2027 budget with credible targets, firm monetary stance from Copom
2002–2003: Concerns over "Lula risk" turned into a rally when economic policies were maintained; Ibovespa up 12.5% through year-end 2002
Sideways with Noise
Mixed signals; Copom resumes rate hikes; dollar fluctuates between R$ 5.30 and R$ 5.70
Late 2022: Following the runoff, the Ibovespa dropped roughly 5% through December while the dollar gained about 2%
Stress
Signals of increased spending, friction with the Central Bank, new taxes on investment
2015: Equities down 13%, dollar up 48%, loss of investment-grade rating
What the data indicates without bias. The initial market shock already priced in what major banks estimated for a Lula scenario (BTG Pactual: −17% on equities, dollar +10% to 15%). Fiscal policy remains unresolved and will not be settled in a single trading session, with key decision dates spanning November through January. Until then, most major institutions anticipate continued pressure (Citi, JPMorgan, Capital Economics), while a minority sees opportunity (Gavekal). Across the three prior instances where Brazil experienced sell-offs of this magnitude, recovery materialized only after concrete policy pivots, never on its own.
Key Indicators to Watch in Coming Weeks
Appointments for Minister of Finance and the economic team for the second term: analysts cite this as the primary signal to monitor.
Copom meeting on November 3 and 4: a rate hike by the Central Bank would validate current yield curve pricing.
Focus economic surveys released in upcoming Monday bulletins: tracking economists' revisions to the dollar, Selic rate, and inflation forecasts.
The 2027 federal budget proposal debated in Congress ahead of the December recess.
Copom meeting on December 8 and 9 alongside year-end corporate remittances, representing the seasonal pressure window for the dollar.
Copom meeting on January 26 and 27, 2027.
How to Position Portfolios Now
There is no single correct answer, and this article does not constitute investment advice. However, distinguishing between immediate emotional reactions and analytical decisions helps guide strategy:
Emergency reserves are not for speculation. Capital needed within months belongs in floating-rate fixed-income assets, which yield steady returns without market volatility with the Selic rate at 13.75% or higher.
Time horizon dictates bond suitability. High yields on IPCA+ bonds only benefit investors who hold them to maturity; those who may need to liquidate early face exposure to mark-to-market losses similar to today's drop.
All-in lump-sum investing assumes catching the exact market bottom. In 2015, equities continued falling for months; in 2020, the rebound occurred within weeks. Scaling in gradually reduces timing risk.
International currency diversification serves as protection, not speculation. XP, for instance, recommends allocating at least 15% abroad. Buying dollars immediately after a 9% single-day surge also carries the risk of a partial pullback.
The Rico aos Poucos sector allocation model, reviewed on October 18 prior to the runoff, already positioned cash (30%) and foreign currency (25%) as its largest weightings, with equities at 5%. Real-time dollar exchange rates are available on the dollar page.
Frequently Asked Questions
Will the stock market keep falling following Lula's reelection?
The exact market bottom remains unknown. Asset prices had priced in a victory by Flávio Bolsonaro, driving the largest sell-off since 1998. In 2014, equities continued falling for two years; in 1999 and 2020, shocks of similar magnitude reversed into recoveries within months. Economic policy responses determined the divergent outcomes.
Will the dollar rise through the end of 2026?
Projections published on 10/26 range from R$ 5.20 to R$ 5.65. December brings seasonal pressure from corporate profit remittances (gains of roughly 3% in December 2024 and 2.89% in December 2025), though historical data from 2000 to 2024 shows December actually recorded the lowest probability of a dollar increase at 46%.
Is it worth buying Tesouro IPCA+ bonds now?
Yields range between IPCA + 7.6% and 8.1%, near the June 2026 record highs. Investors who hold bonds to maturity lock in those yields, whereas those who may sell early risk mark-to-market losses, such as the 23.6% single-day drop recorded by the IPCA+ 2050 bond.
Are dividends going to be taxed?
They already are: since January 2026, a 10% withholding tax applies to dividends exceeding R$ 50,000 per month from the same company. No new formal tax proposals had been submitted as of 10/26/2026, and any future tax changes must pass through a Congress where the PL holds the largest legislative bloc.
Will the Selic rate rise again?
The yield curve is pricing in roughly a 75% probability of a 0.25 percentage point rate hike at the Copom meeting on November 3 and 4, following five consecutive cuts that brought the Selic rate to 13.75%.
Data Sources
Election results: TRE-SP/TSE, October 25–26, 2026. Polls: Datafolha and Quaest, October 24, 2026.
Ibovespa, dollar, DI futures, circuit breaker, and analyst commentary: InfoMoney (live coverage, 10/26/2026), CNN Brasil (10/26/2026), Reuters via Investing.com (10/26/2026), Seu Dinheiro (10/26/2026).
Tesouro Direto: InfoMoney and Seu Dinheiro (10/26/2026); InvestNews (10/23/2026); InfoMoney (06/18/2026 and Feb 7, 2024); Investidor10 (Feb 1, 2025).
Post-election history: Elos Ayta via InfoMoney (10/23/2026); FGV/DataBay via Suno; Exame (2022).
1998, 1999, and 2015 data: InfoMoney; TradeMap. 2014 data: Terra and Central Bank of Brazil.
Foreign exchange projections: Exame (10/26/2026); BTG Pactual via Exame; Focus Bulletin via Forbes Brasil (through 10/23/2026).
December dollar performance: Seu Dinheiro (2024), DGABC (2025), Clube dos Poupadores (2000–2024).
IFIX index: Meus Dividendos, Mais Retorno, InfoMoney.
Law No. 15,270/2025: Felsberg Advogados. Congress projections: TV Senado and Agência Brasil (first-round projections).
This content is for informational purposes only and does not constitute investment recommendations.
